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Can't afford mortgage down payment? Flagstar Bank might pay it for you

The zero-down mortgage gets extra sizzle under a new program from Flagstar Bank that throws money toward closing costs, too.

Yes, some low-income and moderate-income home buyers in Michigan might do a double-take on this one. Those who qualify would be able to receive a gift of the 3% required down payment -- plus up to $3,500 toward closing costs -- from Flagstar.

Borrowers would not have to repay the down payment or closing costs. But a 1099 form to report the income would be issued to the Internal Revenue Service by the bank. So the gifts could be taxable, depending on the borrower’s financial picture.

Mortgage lenders -- including Flagstar, Fifth Third and United Wholesale Mortgage -- are coming out with creative deals to drive up mortgage traffic for buyers. Refinancing is down significantly from a year ago since rates have edged up. And there continues to be a need in many communities for programs that can help people who do not have enough money for a down payment.

Many millennials and others have good jobs now and can afford to make monthly mortgage payments. They'd love to buy a house to take advantage of low interest rates before rates climb even higher. But many potential first-time buyers and others find it a huge hurdle to save thousands of dollars for a down payment.

Flagstar said borrowers who might qualify for its new program typically would have an annual income in the range of $35,000 to $62,000. The sales price of the home -- which must be in qualifying areas -- would tend to be in the range of $80,000 to $175,000.

The mortgage rate would depend on the credit score of the borrower, but could range around 4% to 4.6%.

The Flagstar program, for example, is available for homes in select, qualifying areas in 18 counties in Michigan. Homes that qualify must be in low-to-moderate income census tracts.

Beverly Meek, the Community Reinvestment Act director for Troy-based Flagstar, said some homes in Detroit, Flint, Inkster, Hamtramck, Hazel Park, Warren, Livonia and elsewhere could qualify.

"A low-to-moderate income person who is looking for a home can get into that home with zero down," she said. "It's a really good time to buy a home -- the economy is better."

A borrower does have to be able to prove they have income from a job or benefits, such as Social Security. Home buyer education is a requirement.

Borrowers in the Flagstar program cannot currently own a home or have owned a home in the last three years.

Consumers can call Flagstar for information about the homeowner gift program at 248-205-1095 from 8:30 a.m. to 5 p.m. weekdays or 8:30 a.m. to 1 p.m. on Saturdays. Consumers also can visit a Flagstar branch.

As with any big financial decision, consumers should spend time reviewing their options, understanding the rules and seeing what they'd qualify for before shopping for a home.

While a down payment can be an obstacle, plenty of lenders are offering some zero or low-down payment mortgages for those facing a financial squeeze.

What potential home buyers need to keep in mind: Ask what, if any, part of such gifts or programs are treated as taxable income. Understand that a seller might be more reluctant in a competitive environment to accept your offer if you're putting little or nothing down.

Home sellers tend to prefer an offer that has a larger down payment and possibly less risk of falling apart.

Even so, many of these fresh starts could help potential buyers.

Lakeshia Wiley, 35, said she wouldn't have been able to buy her first home without the Fifth Third Down Payment Assistance program and two other grants, including one from Southwest Solutions.

The brick home, built in 1951, is on Detroit's west side, needed very little work and was priced at $50,000.

"I'm very excited every time I think about it. It's beautiful. I love it," Wiley said.

Wiley never expected to be able to buy a home, though, because she has had a hard time saving for a down payment.

"I didn't think I'd be able to do it," said the single mother who has two sons, ages 17 and 10, and a daughter, age 6. She works at a Detroit pharmacy.

Thanks to the down payment assistance and the grants, Wiley was able to buy her home in April. She had to bring less than $350 to the table at closing.

She went from paying about $800 a month for rent to less than $450 a month for her mortgage, property taxes and insurance.

"It's a big help," she said.

She's looking to celebrating her first Thanksgiving in her home.

The program offered by Cincinnati-based Fifth Third Bank is two-pronged. It is open to both low-income buyers, as well as those who want to buy a home in low-income areas. The goal is to help lower-income families buy homes and offer a way for those who have higher incomes to help revitalize neighborhoods.

The home's price can’t exceed $120,000 for zero down. But some borrowers can bring money to the table, if considering a higher priced home. One does not need to be a first-time buyer.

The down payment gift does not need to be paid back -- and it can be combined with some other down payment assistance programs offered at the state and local level. But the gift would be treated as taxable income.

So far, Fifth Third has awarded more than $1 million in down payment assistance through the program. The average assistance is $2,900. Credit scores as low as 640 may be eligible, but the bank said many applicants have higher credit scores.

To be eligible for the Fifth Third plan, the property must be in Michigan, Indiana, Illinois, Kentucky, Tennessee, Ohio, West Virginia, North Carolina, Georgia or Florida.

Fifth Third Mortgage President Ed Robinson said the program fits into the bank's regulatory obligations to provide credit to the communities where they operate, including low- and moderate-income neighborhoods. But other issues come into play as well.

Many families lost a good deal of savings after the financial crisis. In addition, home prices in some areas have climbed significantly so some cannot come up with anything close to a 20% down payment. So people need help with down payments.

"We've looked to target folks that are trying to really get into first-time home buying or areas that need revitalization," Robinson said.

Consumers who do not have a large amount saved for a home can shop around, as many lenders, including Quicken Loans, offer programs with as little as 3% down.

United Wholesale Mortgage offers a 1% down payment program through a network of independent mortgage brokers. See FindAMortgageBroker.com to find a broker in your area. United Wholesale Mortgage does not work with borrowers directly.

The program requires the borrower to contribute 1% of the loan amount from their own money. Then, United Wholesale Mortgage provides a gift of 2% of the loan amount -- up to a maximum of $5,000 -- so the borrower ends up with 3% equity in the home at closing.

If the borrower wants a more expensive home, say $300,000 or more, any additional money needed to meet that 3% down payment level would need to be obtained elsewhere, possibly from a family member.

The United Wholesale Mortgage product does not include an extra gift for closing costs. But in many cases, the consumer could choose a mortgage with a slightly higher rate to pay for the closing costs.

For the 1% program, borrowers need an income within Fannie Mae's limits, which are based on the county where you're buying a home.

Home buyers in some counties tend to have higher incomes so they typically can afford to put more money down when buying a home, said Brad Pettiford, communication strategist for Troy-based United Wholesale Mortgage, division of United Shore Financial Services.

Oakland County, for example, does not have a large group of people with low down payments, so that county is considered under-served by Fannie Mae and would have more relaxed limits.

The United Wholesale Mortgage program is part of the Fannie Mae HomeReady program. First-time home buyers -- defined as someone who hasn't owned a home in the past three years -- would be required to take an online first-time home buyer course.